China is Leading the Charge Against the U.S. Dollar – Here’s What You Need to Do
Shah Gilani|May 12, 2023
Yesterday I wrote about the reasons behind the trend toward de-dollarization and how that should impact your investing strategy overall, so you’re prepared for the worst when it comes.
But what about now? What immediate actions are countries taking to weaken the dollar, who is most active in the push to dethrone it, and what’s going to be the world’s next reserve currency?
Well, the unfortunate answer to the first part of that question is that there are several multinational coalitions now forming to create trade agreements which will allow them to do business with one another in currencies other than the dollar. And while we don’t know exactly what will eventually replace the USD as the world’s reserve, there is one country pushing harder and faster than anyone else to center their currency in international trade.
It’s China.
While globalization led to international stability and paved the way for China’s incredible ascent to superpower status and boasting the second biggest economy on Earth, it’s now moving down a new path – one marked by de-globalization, bilateralism, resource nationalism, protectionism, and militarism.
On that new march, China doesn’t mind trampling the dollar – not into oblivion, at least not for a few more years, but into a place where the yuan can rise.
Some of the things they’re doing have been in the headlines already; you’ve probably already seen them. But you probably don’t know how long they’ve been at this. It’s at least a decade in the making, and it’s working.
So today, I’m pulling back the curtain on how what’s happening right now in the charge against the dollar, how China’s actions put it front and center of that charge, and of course, what investment and trading opportunities all this opens up for you.
Let’s get started.
The Most Recent Steps to Dethrone the Dollar
On December 9, 2022, at a meeting of the Gulf Cooperation Council (GCC), Saudi Royals hosted Chinese president Xi Jinping for first time, as China, a net importer of oil since 1993 and having surpassed the U.S. in 2017 as the largest importer of oil in the world, talked about paying for oil in Chinese yuan as opposed to the USD.
Since almost one-quarter of Saudi oil output now goes to China, the possible beginnings of the de-dollarization of oil, the potential end to the petrodollar regime in place since 1974 could be devastating to the dollar, as well as U.S. influence in the Middle East and globally.
Brazil and Argentina are openly contemplating creating a common currency. The United Arab Emirates and India are exploring rupee purchases of non-oil products from the UAE, potentially leading to oil purchases in rupees.
Russia and Iran are working together on a cryptocurrency backed by gold.
So are the BRICS, the nations of Brazil, Russia, India, China, and South Africa are reportedly stockpiling gold which they might tie to their own gold-backed crypto. They’re also discussing a crypto tied to commodities, or rare earth elements, or land. The “definition of a new structure” could be announced at the next BRICS summit this August in South Africa.
The ASEAN bloc, the Association of Southwest Asian Nations, which includes Brunei, Cambodia, Indonesia, Philippines, Singapore, Malaysia, Myanmar, Laos, Vietnam, and Thailand, are exploring ways to decrease dependence on the USD and use local currencies in trade settlements.
At the last ASEAN meeting in March 2023, Malaysian prime minister Anwar Ibrahim suggested an Asian Monetary Fund, while Indonesian President Joko Widodo spoke adamantly how “We must remember the sanctions imposed by the US on Russia” and realize we could be next.
And at the March 30-31 meeting in Bali of Asian finance ministers and central bank governors, adoption of a Local Currency Transaction (LCT) system, an extension of previous settlement system, included pushing the use of credit cards issued by local banks and gradually stopping using foreign payment systems to protect their countries from “possible geopolitical repercussions.”
Just last month in April, India and Malaysia announced they would settle some bilateral trade in Indian rupees and not incur the cost of using dollars as an intermediary currency.
And what do all of these alliances have in common? Trade partnerships with China.
China’s Role in the De-Dollarization Struggle
There’s talk, then there’s action. And that brings us to China, the only other superpower on the planet, the biggest trading partner for most countries in the world, and a future wannabe reserve currency issuer bent on eventually dethroning the dollar.
China’s once misunderstood Belt and Road Initiative can now be clearly seen for what it always was, a brilliant “hyper-finance model,” a 21st century high state-driven, debt-fueled growth model designed to extend Chinese influence and yuan denominated debt across Africa, Asia, the Middle East, and wherever their cheap infrastructure financing and economic growth models might be adopted.
Launched in 2013, Belt and Road has cost China over $1 trillion, but has gotten the country into strategic industries, into resource development, into political and financial and strategic alliances the West never thought about. It’s also gotten a lot of countries into financial bed with China and the yuan.
China is now the largest trading partner to 120 countries. By comparison, the US is the largest trading partner to 30 countries. China is by far the world’s biggest commodity importer, which includes oil.
Not unlike the Americans before them (and the British before them, and other global trade leaders before them, etc.) the Chinese can, when they see fit, cause their trading partners to shift from dollar trade to yuan trade, or a multicurrency regime, or maybe a digital currency regime of their creation.
And their influence is already apparent.
Brazil and China recently set a new milestone just before Luis Inacio da Silva (Lula), Brazil’s president visited China. Xi and Lula established the first bilateral settlement of trade between the countries in Chinese Yuan. The settlement processed by the Industrial and Commercial Bank of China ICBC, paves the way for cheaper and simpler payments between the two countries. At the meeting between the two leaders in China, the potential integration of Brazil into China’s Belt and Road Initiative was discussed.
Lula in a speech at appointment of former Brazilian president Dilma Rousseff as president of the New Development Bank in Shanghai, the so-called BRICS’ bank, said, “I ask myself every night why all countries have to base their trade on the dollar? Why can’t we trade using our own currencies? Who decided that the dollar would be the dominant currency after the gold standard disappeared?”
China’s been trading a lot more with Brazil lately. Bilateral trade reached $150 billion in 2022, up 10% from 2012, according to S&P Global Market Intelligence.
The same thing’s happening with Russia, to an even bigger degree.
Russia and China’s deeper cooperation since Russia invaded Ukraine saw Russian ruble / yuan trade rocket up 80x in the last 8 months. The yuan replaced the USD as most traded currency in Russia this year.
But as quickly as China appears to be moving to de-dollarize the world, they’re not nearly ready to take over or own the global reserve currency mantle, though they will hold that crown in a matter of years.
For the yuan to serve as a reserve currency, China still needs bigger, deeper, more liquid markets, and far fewer restrictions on inflows, and more importantly, outflows. In other words, China will have to do away with all capital controls if it wants the yuan to finance global trade and domestic growth.
In the meantime, China will continue to push its trading partners into a new non-dollar exchange mechanism, maybe a multipolar currency or commodity-based exchange instrument, maybe some kind of digital currency backed by gold or rare earth elements, maybe something only the Chinese could dream up, but it’s coming.
The question for everyone else is, what are you going to do about it?
These Are the Best Ways to Profit When the Dollar Falls
There is a simple logic at the heart of making money on a weak USD – if an asset’s falling, you short it.
There’s a complicated game you can play with CFD (contract for difference) derivatives, but for most people the simplest method is trading currency ETFs that are short on the dollar and long on other currencies. The Invesco DB U.S. Dollar Index Bearish Fund (UDN) is a good candidate for this, as is the WisdomTree Chinese Yuan Strategy Fund (CYB), especially if the yuan starts to gain serious global prominence as a trade currency.
Likewise, keep an eye on the decline of foreign interest in Treasuries and play inverse bond ETFs like ProShares UltraPro Short 20+ Year Treasury (TBT).
And like I said last week, hard assets and commodities need to be a priority for anyone who’s playing the long game here. Gold, especially, is potentially on the cusp of a comeback the likes of which we haven’t seen in over a decade.
I know a guy who’s so confident about the potential in gold right now that he’s staked over $1 million in capital on what he thinks is a historic commodities surge. And while owning gold is one way to make money on that surge, it’s not the best way – but he’s got a full briefing on exactly how he intends to play it and where the biggest gains could be.